QUALIPORT
Is There Value In Health And Safety?

By Maynard Paton (TMFMayn)
December 10, 2001

Carburton Street, London -- Two companies on the Qualiport's watch list -- Halma (LSE: HLMA) and SSL International (LSE: SSL) -- published their interim results recently. Both firms are involved in health and safety matters. Are either company's shares presently fit for the Qualiport?

Halma

Halma issued its half-time numbers on December 4th.

                            Six months to       Six months to
                             30 Sept 2001        30 Sept 2000
 
 Turnover (£k)                130,773             126,274
 Operating Profit* (£k)        22,555              22,339
 Exceptionals (£k)                  0                   0
 Pre-tax Profit* (£k)          22,663              22,376 

 
 Earnings per share* (p)         4.23                4.14 
 Dividend per share (p)          2.08                1.81

 (*adjusted for goodwill) 

The salient points concerning Halma and its latest results are:

* Halma develops, makes and markets products that enhance public and workplace safety. Applications include fire and gas detectors, lift electronics, ophthalmic instruments, industrial resistors and water leak detectors;

* The group commendably concentrates on activities where "products and services are differentiated on the basis of performance, not price, and where barriers to entry are high". Growth is driven by new products and self-funded acquisitions;

* Halma's products generate sturdy financials. Operating margins are consistently around the 18% mark, while the group's incremental return on equity since 1995 has been a solid 14%. What's more, Halma has registered an annual 15%-plus increase in its dividend for the past 20 years, and;

* Halma hasn't escaped the recent economic downturn. With a third of group sales generated in the US, the latest results showed overall turnover creeping just 4% higher to £131m. Pre-tax profits edged 1% higher to £22.7m.

Halma continues to be a great business for long-term investors. Although not characterised by hyper-growth, the company's products lend themselves to steady, stable and resilient profitability. In addition, Halma's long-standing management are from the top drawer. Increased R&D investment combined with opportunities for further acquisitions underpins near-term growth.

In terms of valuation, Halma generated 9.28p per share of free cash during the twelve months ending September 2001. At 161p, Halma shares stand on a historic free cash flow yield of 5.8%. Assuming 5% growth in free cash in the forthcoming year, Halma's shares would need to fall to 130p to offer a prospective free cash flow yield of 7.5%.

SSL International

SSL International published its interim figures on November 27th.

                            Six months to       Six months to
                            30 Sept 2001        30 Sept 2000 


 
 Turnover (£m)                  281.2               284.9
 Operating Profit* (£m)          13.2                24.4
 Exceptionals (£m)                3.2               (33.7)
 Pre-tax Profit* (£m)             2.4                28.2 
 



 Earnings per share* (p)         (1.4)               11.2
 Dividend per share (p)           3.9                 3.9 

 (*adjusted for goodwill) 

The salient points concerning SSL and its latest results are:

* SSL was formed during 1998 and 1999 following a three-way merger between Seton Healthcare, Scholl and London International. SSL's product range encompasses Durex condoms, Scholl foot care treatments, Biogel surgical gloves and Marigold household gloves.

* Many of SSL's products have dominant sector positions. Within the latest results, the company highlighted its 89% share of the UK condom market, its 52% share of the UK footcare market, and its 30% share of the US surgical glove market.

* SSL's finances are a mess. The mergers led to substantial restructuring charges, exceptional items and business disposals. Combined with a change in the financial year-end and an accounting scandal, results from SSL over the past few years have been indecipherable. The latest figures continued the complex trend, with plenty of irregular costs clouding the numbers.

While the financials are impenetrable, the attractions to SSL's products are clear -- they're repeat purchase, recession proof and largely price insensitive. Essentially, SSL has been a mismanaged franchise in the past, and as such, can be currently deemed a potential glitch investment. The company's fundamentally strong products, combined with the fresh management team, should herald an operational turnaround at some point.

In terms of valuation, if we assume...

* Annual sales remain flat at £618m;
* Underlying operating margins are 20%;
* Net interest payments come to £19.9m (SSL had net debt of £332m at September 2001);
* Profits are taxed at 30%, and;
* Accounting earnings are reflected as free cash.

...then SSL's 'underlying' free cash flow per share comes to 38.4p. At 537.5p per share, SSL offers an underlying free cash flow yield of 7.1%. However, operating margins recovering to 20% and earnings being fully reflected in free cash are by no means guaranteed as and when a full recovery emerges. And the timing of any completed turnaround is unclear at the moment, too. A greater margin of safety is therefore needed for prospective shareholders. Given the continuing uncertainties at SSL, for the Qualiport to seriously consider an investment, the shares would have to fall to 384p and hence offer an underlying free cash flow yield of 10%.

More: When Harry Halma Met The Qualiport | Halma discussion board | SSL: Watching And Waiting | SSL International discussion board